Insurers Facing Major Long Term Care Policy Payouts

US insurance providers will soon need to make substantial payouts to customers who purchased long-term care policies, which provide for post-retirement care either at home or in established elderly care facilities.

Insurers initially offered LT care products to meet the needs of a clientele that stands to live longer than any recorded generation. Clients spooked by the specter of rising long-term health costs eagerly snapped them up. The industry is now ruing its own success as payouts to customers balloon.

Insurance companies socked away substantial funds during the third quarter to meet upcoming payment commitments. Unum Group has set aside nearly $600 million to cover long-term policy payments; Prudential Financial reports a reserve of $1.5 billion. MetLife, Genworth Financial and other major insurers will report soon on the size of their reserve funds.

The problem is not confined to near-term needs. Unum Group said it believes that elevated payout levels will remain a factor for some time. Fitch Ratings expects insurance companies to continue bolstering their LT payout reserves into and through the next year.

A review is underway at some insurers of the conditions on which they based their legacy LT care policies. Many policies were apparently based on longevity and health cost statistics that are now well outdated. Pretty much everyone sees longevity as a good thing, but the cost seems to have caught many in the insurance industry by surprise.

For insurance companies, reserves are conditioned by state legislation. Insurers traditionally predict the expected health levels of the population and base their reserves on these estimates. Some states set the bar high to prevent any rose-colored predictions from destabilizing the system. This variable is a sensitive matter and a key contributor to the excessive reserves issue.